F AD-ALG6 839 GENERAL ACCOUNTING OFFICE WASHINGTON DC COMMUNITY AN-ETC F/G 5/4SBAIS 7(J) MANAGEMENT ASSISTANCE PROGRAMI CHANGES NEEDED TO IMP-ETC(U)SEP al

UNCLAS S IFIEDGAOICEDSL1A NL

ADA106839 LEYEL.____BY THE COMPTROLLER GENERAL

OF THE UNITED STATES

SBA's 7(J) Management. Assistance/Program: Ctanges Needed;( im6 mproveEfficiency nd Effectiveness.

The Small Business Administration providesmanagement and technical assistance to small busi-nesses through two prograns authorized under sec-tion 7(j) of the Small Business Act

Under one program, SBA relies on outside con-tractors to provide manechnicalIasistance G oted instances wherecontractorcosts were excessive and less costly inhouseresources could have been used. Under the otherprogram, GAO found that SBA had not establishedan overall plan defining specific goals and object-Ives. As a result several projects were fundd oservices that

-fell outside the program's legislative ob-jectives

-benefited only one or a few firms, and

-SBA should have performed Itself. D T ICGAO is making a number of recommendations tocorrect these and other problem ELECTE

NOV 9 Joelj

DD

Approved for public oWz O1 ISDill 0 6ton U9t4d

ia o6 0 9

k/ rJ

COMPTROLLER GENERAL OF THE UNITED STATES

WASHINGTON D.C. 205

B-201727

To the President of the Senate and theSpeaker of the House of Representatives

This report, which was prepared pursuant to Public Law95-507, discusses the Small Business Administration's 7(j)Management Assistance Program. The report discusses the needfor better program planning and management and recommends thatthe Small Business Administration make a number of improvements.

We are also sending copies of this report to the Director,Office of Management and Budget; the Administrator, SmallBusiness Administration; and other interested parties.

Comptroller en ralof the United States

Accession For

NTIS GA.&IDTIC TABUnannounpcdJustifical 'in . . .

Hy .. ..Distribution/

Availability CedI)sAvail and/or

Dist Special

COMPTROLLER GENERAL'S SBA'S 7(j) MANAGEMENTREPORT TO THE CONGRESS ASSISTANCE PROGRAM:

CHANGES NEEDED TO IMPROVEEFFICIENCY AND EFFECTIVENESS

DIGEST

Administrative problems have limited the impactof the Small Business Administration's (SBA's)7(j) Management Assistance Program. For example,program resources have not been well coordinatedwith other SBA programs and funds targeted for8(a) firms were used for questionable purposes.SBA needs to correct these and other deficienciesto improve program efficiency and effectiveness.

This report is the last in a series GAO hasissued pursuant to Public Law 95-507 whichrequired GAO to evaluate certain SBA programs.

HISTORY AND PURPOSE OFTHE 7(j) PROGRAM

The 7(j) program is part of a larger SBA effort tohelp socially and/or economically disadvantagedpeople create and maintain small businesses byimproving their technical and management skills.

The program is divided into two segments commonlyreferred to as sections 7(j)(1-9) and 7(j)(10).Section 7(j)(1-9), which originated in 1967 withthe Economic Opportunity Act of 1964, as amended,authorizes SBA to contract with consulting firmsthat agree to be "on call" to provide counselingand general management assistance to eligibleindividuals referred to them by SBA. Section7(j)(10), which was created in October 1978 byPublic Law 95-507, authorizes SBA to providesupplementary management and technical assist-ance exclusively to firms participating in SBA's8(a) program. The 8(a) program is designed tochannel noncompetitive Federal contracts to dis-advantaged small businesses to help them becomeself-sufficient. (See pp. 1 to 5.)

Funds allocated to the 7(j) program have risenover the years from about $1.2 million in 1971to about $10 million in 1981. Likewise, thenumber of small business owners served has grownfrom 1,040 clients in 1971 to an estimated6,840 clients in 1981.

i CED-81-149

SEPTEMBER 29, 1981

SBA's 7(j)(1-9) CALL CONTRACTINGPROGRAM NEEDS IMPROVEMENT

GAO found that the Call Contracting Program hasnot been effectively administered. Consequently,program funds have not been used in the mostefficient manner, resulting in fewer clients re-ceiving management and technical assistance thanwould otherwise have been possible. Specificproblems identified included:

--Using call contractors when less expensiveagency resources were available. For example,SBA paid $38,659 to a call contractor to con-duct a seminar for women on how to preparea loan package. Approximately $21,000 ofthis contract was for services that SBA hadthe inhouse capability to provide.(See pp. 7 to 11.)

--Applying different contracting methods with-out reasonable controls over rates. GAO foundwide variations in costs between competitiveand noncompetitive 8(a) call contracts. Asample of 40 contracts from fiscal years 1978through 1980 disclosed that noncompetitive8(a) contracts were on the average 49 percentmore expensive than competitively awardedcontracts during those last 2 years. However,little difference existed between the timetaken to complete the work or the usefulnessof the services provided under either con-tracting method. (See pp. 11 to 14.)

--Allowing call contractors to make excessiveuse of subcontractors. SBA's allowable sub-contracting limit of 50 percent of the con-tract work was exceeded for 14 of the 40contracts reviewed. (See pp. 14 and 15.

MIXED OPINIONS ON THE VALUEOF CALL-CONTRACTING SERVICES

Small business owners had varying opinionsregarding the value of the advice call con-tractors gave them. GAO, through the use ofa questionnaire, interviewed a random sampleof 302 owners and found that 34 percent feltthe call contractor's report was of very greator great value, while 23 percent indicated thatit was of little or no use. The remaining busi-nesses either indicated that the report was ofmoderate or some value or chose not to respondto the question. Similarly, when asked howmuch of the advice was actually implemented,

ii

34 percent stated that they tried to implementall or most of the advice, while 25 percentstated that they acted on half or less. Another19 percent said that few or no changes weremade and the remainder did not respond.(See pp. 16 and 17.)

SBA procedures require agency personnel to con-tact all businesses receiving call-contractingassistance to ascertain the value of the servicesprovided. However, only 54 percent of the 302clients GAO interviewed said that SBA contactedthem about the results of the contractor's work.Thirty-four percent said that SBA did not contactthem, 11 percent were uncertain if SBA followedup, and the remainder did not respond.(See p. 16.)

ThE 7(i)(10) PROGRAMLACKS DIRECTION

Although 27 projects totaling about $4 millionwere funded by SBA's central office under the7(j)(10) program in fiscal years 1979 and 1980,SBA has not developed a plan for administeringthe program nor has it established specificprogram goals, objectives, or priorities. Thelack of planning weakened the overall administra-tion of the program and led to subjective fund-ing decisions and a reliance on unsolicitedproposals to satisfy program requirements. Thelack of planning also contributed to the awardof contracts which covered a broad range ofactivities and moved the program in scattereddirections. (See pp. 20 to 23.)

GAO also found that while 15 of the 27 projectsfunded during this period effectively furtheredthe program, 12 did not. Problems regarding these12 fell into three categories:

--Projects which were not within the legisla-tive objectives of the 7(j)(10) program.

--Costly projects which benefited only one or afew 8(a) firms, thereby limiting the number offirms the program could serve.

--Projects which SBA should have performeditself.

For example, SEA gave the city of Buffalo$200,000 to fund a project aimed at reducingunemployment in that area. Although the 7(j)(10)

Tear Sheet iii

program was created to benefit only 8(a) firms,as of June 1981, no 8(a) firms had received anybenefit under this project. In addition, theSBA official responsible for administering theproject agreed that it was not within the scopeof the 7(j)(10) program. The project, however,was within the purposes of 7(j)(i-9). As such,the use of 7(j)(10) funds for this project wasa matter of agency policy and management.(See pp. 23 and 24.)

SBA also funded six costly projects which bene-fited only nine 8(a) firms. Two of these proj-ects, which assisted one 8(a) firm, amountedto $395,000. Since receiving the 7(j)(10) assist-ance, the firm has been awarded only one 8(a)contract for about $400,000. (See pp. 25 to 27.)

In addition, SBA supplemented internal resourcesby awarding several contracts to perform func-tions it should have performed. For instance,SBA contracted with a consultant in September 1979to develop a manual regarding SBA's 8(a) specialprocurement program. GAO compared the completedmanual with existing SBA standard operating pro-cedures and found much duplication. (See pp. 28to 30.)

Aside from using 7(j)(10) funds for question-able purposes, SBA also did not adequatelymonitor contracts awarded under the program.In GAO's opinion, this resulted from the lackof procedures describing the duties of indi-viduals responsible for monitoring these con-tracts. (See p. 30.)

GAO believes that the problems associated withthe 7(j)(10) program were the result of inade-quate planning and limited monitoring. SBAhas recognized and is now addressing some ofthe shortcomings in the 7(j)(10) program.However, additional improvements are needed tostrengthen program planning and monitoringefforts.

RECOMMENDATIONS TO TIESBA ADMINISTRATOR

The SBA Administrator should take severalactions to strengthen the management of bothprograms and to better ensure that the programs'resources are efficiently used. For example,procedures should be developed for systematicallyscreening all requests for management assistance

iv

which identify the types of assistance programsavailable and the clients these programs arebest capable of helping. In addition, a plancontaining specific goals and objectives con-sistent with the program's legislative mandateshould be developed for the 7(j)(10) program.Specific recommendations are discussed on pages18, 19, and 33.

SBA COMMENTS

SBA agreed with GAO's recommendations forimproving the management of the 7(j) programs.SBA stated that it has already initiated actionson several GAO recommendations and will takeadditional corrective actions on others in fis-cal year 1982. (See app. IV.)

Tear Sheet v

Now -I

Contents

Page

DIGEST i

CHAPTER

INTRODUCTION 1Origin of the 7(j) program 1Program funding, eligibility, and

administration 2Where the 7(j) programs fit in

relation to other SBA managementassistance programs 4

Prior studies of the Call ContractingProgram indicated many problems 5

Objectives, scope, and methodology 5

2 SBA NEEDS TO IMPROVE ITS ADMINISTRATIONOF CALL-CONTRACTING SERVICES 7

Call contractors used when lessexpensive resources were available 7

Differences in task-day costs betweencompetitive and noncompetitive8(a) contracts 11

Subcontractors were used excessively 14Client satisfaction was mixed 15Conclusions 17Recommendations 18SBA comments 19

3 SBA NEEDS TO IMPROVE ITS MANAGEMENT OF THE7(j)(10) PROGRAM 20Program planning has been inadequate 20Many contracts contributed little to

program objectives 23Inadequate monitoring of 7(j)(10)

contracts 30Recent SBA actions 31Conclusions 32Recommendations 33SBA comments 33

4 SCOPE AND METHOD OF THE REVIEW 34

APPENDIX

Reports issued by GAO pursuant toPublic Law 95-507 37

APPENDIX Page

II Prior reports by GAO, SBA internal auditors,and private consultants under contract toSBA regarding SBA's management assistanceprograms 40

III Selected responses by recipients of SBA's7(j)(l-9) call-contract assistance 44

IV Letter dated August 28, 1981, from theAdministrator, SBA 46

ABBREVIATIONSCOTR contracting officer's technical

representative

GAO General Accounting Office

MAD Management Assistance Division

MSB/COD Minority Small Business and CapitalOwnership Development

SBA Small Business Administration

CHAPTER 1

INTRODUCTION

This report is the last in a series of reports we haveissued pursuant to Public Law 95-507, approved October 24, 1978,which requires us to evaluate certain Small Business Administra-tion (SBA) programs. This report deals with SBA's managementassistance programs authorized by section 7(j) of the SmallBusiness Act, as amended.

A complete list of reports we have issued pursuant to Public

Law 95-507 appears in appendix I.

ORIGIN OF THE 7(j) PROGRAM

The 7(j) management assistance programs represent an expan-sion of the Call Contracting Program established in 1967 throughan amendment to the Economic Opportunity Act of 1964 (PublicLaw 88-452). The purpose of the Call Contracting Program was tohelp socially and/or economically disadvantaged people establishand maintain small businesses by improving their technical andmanagement skills. The term "call contracting" refers to themethod in which assistance is provided to eligible small busi-nesses (see p. 3).

Public Law 93-386, approved August 23, 1974, transferred theCall Contracting Program from the Economic Opportunity Act tosection 7(j) of the Small Business Act. Although SBA had alwaysbeen responsible for administering the program, the transfer ofauthority was intended to eliminate confusion if the EconomicOpportunity Act expired. While no changes were made to the CallContracting Program as a result of this transfer, Public Law95-507 subsequently modified the program by:

--Adding a new section 7(j)(10) to provide supplementarymanagement and technical assistance exclusively to smalldisadvantaged businesses participating in a specialcontracting program authorized under section 8(a) ofthe Small Business Act.

--Assigning responsibility for the entire 7(j) program toan Associate Administrator for Minority Small Businessand Capital Ownership Development (MSB/COD). BeforePublic Law 95-507 was passed, the Call Contracting Pro-gram was administered by SBA's Associate Administratorfor Management Assistance.

A primary objective of Public Law 95-507 was to improveSBA's administration of the 8(a) program. Under the 8(a) program,SBA acts as a prime contractor to Federal departments and agenciesand fulfills the prime contracts by subcontracting the work toeligible disadvantaged small businesses. Firms participating inthe 8(a) program are expected to develop into self-sufficient

f1

entities capable of competing in the marketplace without 8(a) sup-port. At that point, the 8(a) firm "graduates" from the program.

PROGRAM FUNDING, ELIGIBILITY,AND ADMINISTRATION

SBA's allocation of funds for management and technicalassistance to small businesses under the 7(j) program has risenover the years from about $1.2 million in 1971 to about $10million in 1981. Similarly, the number of businesses assistedrose from 1,040 in 1971 to an estimated 6,840 in 1981.

For fiscal years 1978 through 1980, program funding has beendivided between the 7(j)(1-9) and 7(j)(10) programs as shownbelow.

Amunt allocated to (note a)Central Number of

Fiscal Total 7(j) Iegions office contractsyear appropriations 7(j)(1-9) 7(j)(i0) 7()i awarded

1978 $ 8,000,000 /$8,000,000 $ (c) $ (c) 861979 11,000,000 7,500,000 1,500,000 2,000,000 1371980 10,000,000 5,000,000 3,000,000 2,000,000 125

a/These amounts represent the original allocations. We noted,however, some variances between these preliminary allocationsand actual contract amounts. For example, in fiscal year 1979,actual 7(j)(10) central office contract awards totaled about$2.1 million, although only $2.0 million had been allocatedoriginally.

b/Includes $1,560,000 retained and administered by central officeto fund small business development centers and nationallyoriented studies or services.

c/The 7(j)(10) program was not established until fiscal year 1979.

Individuals or firms eligible to receive assistance undersection 7(j)(1-9) include those receiving business loans underSBA's Economic Opportunity Loan Program, 1/ firms participat-ing in the 8(a) program, and firms located in areas of highunemployment.

1/The Economic Opportunity Loan Program provides financialassistance to socially and/or economically disadvantagedindividuals who cannot get assistance from the privatesector or other SBA programs. Our report entitled "MostBorrowers of Economic Opportunity Loans Have Not Succeededin Eusiness" (CED-81-3, Dec. 8, 1980) provides specificinformation pertaining to this loan program.

2

The Associate Administrator for MSB/COD is responsiblefor the overall administration of both programs. The programsare carried out by MSB/COD's Office of Development Assistance.However, the day-to-day management of the 7(j)(1-9) call con-tracting program has been delegated to SBA regional and districtoffices. On the other hand, administration of the 7(j)(10)program is shared by these field offices and the central office.Additional distinctions between the two programs are describedbelow.

7(j)(l-9)--CallContracting Program

Under this program SDA awards both competitive and noncom-petitive contracts to management consulting firms that agree tobe "on call" to provide business counseling and general managementassistance to eligible recipients referred to them by SBA. Underthe competitive selection process, prospective contractors respondto a request for proposal that specifies the type and estimatednumber of days of services that will be needed in the upcomingyear in various areas of the United States. The prospectivecontractors state their qualifications, the estimated number ofservice days they can provide to eligible businesses, and thedaily rate for their management services. These proposals arereviewed by a central office committee, and contracts are awardedby the central office to those considered most qualified. Thecommittee evaluates all proposals based on three criteria: (1)quality, experience, and staff capability, (2) previous experi-ence and effectiveness in performance, and (3) price per taskday. The first two criteria are weighed at 40 points each,and the price criteria is weighed at 20 points.

In the second method, the assistant regional administratorsnegotiate with and award noncompetitive contracts to 8(a) manage-ment assistance firms. To further develop 8(a) firms, thesenoncompetitive contracts are awarded exclusively to firms parti-cipating in the 8(a) program. Before fiscal year 1980, a portionof the 7(j)(1-9) resources was set aside for noncompetitive 8(a)contracts. In fiscal year 1980, such contracts were awardedusing 7(j)(10) resources. Services provided by these 8(a) firmsare basically the same as those provided under the competitivemethod. Firms selected under the two methods are combined toform a pool of "call" contractors which SBA's regional and dis-trict offices can use to provide management and technical serv-ices to eligible firms.

Contracts under both methods are usually awarded for 1 year.Services are requested through the issuance of task orders byregional or district offices. Task orders usually request thecontractor to provide management assistance in any one or a com-bination of the following areas: (i) general management, (2)accounting and bookkeeping, (3) marketing and advertising, (4)production and engineering, and (5) execution of Government con-tracts. Task orders can last from 1 day to 2 months or more

3

depending on the assistance required. The contractor must issuea report at the completion of each task assignment. If SBA ap-proves the report, it pays the contractor at the agreed upondaily contract rate for the work performed. This process cancontinue up to the dollar limits stated in the contract.

7(j)(10)--Small Business andCapital Ownership Development Program

The 7(j)(10) program, created to provide supplementary man-agement and technical assistance exclusively to 8(a) firms, wasestablished in response to criticism of the 8(a) program voicedat congressional hearings in 1978. In Senate Report No. 95-1070,on the bill that eventually became Public Law 95-507, the com-mittee noted that despite the special procurement opportunitiesprovided to 8(a) firms, few had graduated from the program.Statements made at the 1978 hearings indicated that one of thekey reasons for the low level of success in the 8(a) program wasthe inadequate level of management and technical assistance of-fered by SBA's business development specialists and existing SBAmanagement programs. In addition, SBA acknowledged that the 8(a)program historically had focused on the award of contracts andhad placed little emphasis on business development. Accordingly,the 7(j)(10) program was created by Public Law 95-507 to supple-ment management and technical assistance already available to 8(a)firms with the expectation that these firms would begin to receivethe intensive professional management and technical assistanceneeded to develop into viable businesses.

Because 7(j)(10) assistance is supplementary in nature,similarities and overlap exist between it and 7(j)(1-9). Forexample, assistance such as accounting and bookkeeping, market-ing, financial counseling, and general management are availableto 8(a) firms under both 7(j)(1-9) and 7(j)(10). In this con-nection, 7(j)(10) funds are also used to award noncompetitivecall contracts as mentioned on page 3. The 7(j)(10) program,however, is intended to emphasize assistance to 8(a) firms indeveloping business plans. The business plan is the cornerstoneof the 8(a) program since it identifies the firm's strategy anresources needed to become a self-sustaining small business.Accordingly, the plan enables SEA to identify the types ofmanagement assistance the firm needs to overcome its businessdeficiencies.

WHERE THE 7(j) PROGRAMS FITIN RELATION TO OTHER SBAMANAGEMENT ASSISTANCE PROGRAMS

Aside from the 7(j) programs administered by MSB/COD, SBA'sManagement Assistance Division (MAD) operates a diversified pro-gram of management assistance to strengthen the operations of smallbusinesses. This assistance falls into two major categories--counseling and training. Counseling services are intended toaddress specific problems encountered by an individual business

4

and are provided by SBA staff professionals, volunteers from thebusiness community, and college students. SBA's training serv-ices, on the other hand, are designed for large groups of pro-spective or actual small business owners. The primary purposeof these services is to discuss problems common to the partici-pants through forums such as prebusiness workshops, problem-solving clinics, and management conferences and courses.

PRIOR STUDIES OF THECALL CONTRACTING PROGRAMINDICATED MANY PROBLEMS

SBA's Call Contracting Program has been evaluated severaltimes over the past 7 years, sometimes as an independent program,and other times as part of a broader review of SBA's minoritybusiness development programs. Reviews have been made by ouroffice, SBA internal auditors, and private consultants undercontract to SBA. These reviews pointed out certain programdeficiencies such as

--ineffective use of program resources,

--insufficient consideration of consultant's capabilitiesbefore contract award,

--inconsistent administrative procedures, and

--untimely and/or inadequate assistance given to clients.

The major deficiencies cited in these reviews as well as proposedrecommendations are summarized in appendix II.

These management assistance problems have been recognized bythe Congress, SEA, and outside organizations. However, as dis-cussed in this report, not enough corrective action has been taken.

OBJECTIVES, SCOPE,AND METHODOLOGY

In accordance with our mandate under Public Law 95-507 andas a result of subsequent meetings with the House and SenateSmall Business Committees, the principal objectives of our reviewwere to determine whether (1) the Call Contracting Program wasoperating efficiently and effectively and (2) the new 7(j)(10)business development program was being implemented as intendedby the Congress.

To accomplish the first objective, we collected and analyzedspecific data on a sample of 1,425 call-contract tasks completedduring fiscal years 1978, 1979, and 1980. The sample of completedtasks was taken from a stratified random sample of 40 contractsadministered by four SBA regions. The 40 contracts representedabout 29 percent of the total number of contracts awarded inthose regions during the 3-year period.

5

The data we collected on those tasks included such itemsas how long it took to complete a task, cost of the task, and whoperformed the work (contractor or subcontractor). Also, to obtainviews on the value of advice given to small business owners, weinterviewed a random sample of 302 clients using a questionnaire.Here we solicited information such as the amount of advice thatwas actually used, value of the advice, and follow up with theclient by SBA.

To accomplish the second objective, we collected and ana-lyzed data on all 27 awards made by the central office underthe 7(j)(10) business development program during fiscal years1979 and 1980. We also collected data on 7(j)(10) funds usedin the regionally administered call contracting program.

We interviewed SBA officials responsible for these two pro-grams at the central office, four regional offices, and eightdistrict offices. We also interviewed 25 call contractors asso-ciated with the program.

More details on the scope and method of our review arepresented in chapter 4.

For purposes of presentation, we discuss both the 7(j)(1-9)and 7(j)(10) funds administered by the regional and districtoffices, and used for the Call Contract Program, in chapter 2.The 7(j)(10) business development program, as administered bythe central office, is discussed in chapter 3. Although bothprograms are closely related, distinctions in administrationmerit this separation.

6

CHAPTER 2

SBA NEEDS TO IMPROVE ITS ADMINISTRATION

OF CALL-CONTRACTING SERVICES

The major goal of the Call Contracting Program is to pro-vide effective management and technical assistance services toaid qualified small businesses. According to recipients of theseservices, this goal has only been partially achieved. Only about34 percent of the 302 recipients we interviewed thought the serv-ice was highly useful. Almost 30 percent stated that the resultswere of moderate or some value while another 23 percent thoughtthe results were of no value. The remaining 13 percent did notexpress an opinion.

Also, our review showed that weak SBA administrative prac-tices caused certain program inefficiencies, resulting in fewerclients being served than otherwise would have been possible.Specifically, the administrative problems we found include:

--Call contractors were sometimes used when other lessexpensive resources were available.

--SBA's contracting methods resulted in large differencesin task-day costs between competitive and noncompetitive8(a) call contracts for similar work performed.

--Contractors made excessive use of subcontractors.

--SBA did not always followup after task order comple-tion to determine client satisfaction.

Although a number of reports critical of SBA's management andtechnical assistance programs were issued between 1974 and 1980 byour office, SBA internal auditors, and SBA consultants, some ofthe same problems remained at the time of our current review.The following sections summarize our observations and conclusions.

CALL CONTRACTORS USED WHEN LESSEXPENSIVE RESOURCES WERE AVAILABLE

In the four SBA regions where we conducted our review, wefound little integration or coordination of SBA's management as-sistance resources in providing the least costly and most effec-tive services which can satisfy client needs. Since the 7(j)Call Contracting Program was transferred from the Associate Ad-ministrator, MAD, to the Associate Administrator, MSB/COD, in1978, SBA has not established guidelines on how the district of-fice staff should coordinate their duties in order to provide thebest management assistance services available to their clients.One result has been the use of call contractors when other lesscostly resources were available, both within and outside SBA.

7

Requests for management assistance can originate from severalsources within SBA's district offices. For example, the financedivision may ask MAD to perform a financial analysis or feasibil-ity study on a prospective client who is applying for an SBA loan.The finance division would be interested in having the call con-tractor determine the client's financial soundness and abilityto repay the loan. Another example would be a request from thePortfolio Management Division, which is responsible for servicingloans guaranteed by SBA. This division may request assistancefrom either MAD or MSB/COD to determine why a client is delin-quent with a loan payment and to provide the management assist-ance needed to help the client meet his or her loan obligation.No operating guidelines exist which spell out the focal point formanagement assistance. As a result, the type of resource selecteddepends on which management assistance person or group receivesthe request. However, we found no systematic approach at SBAdistrict offices for matching available resources with clientneeds.

In this connection, we noted that a 1980 report by an SBAconsultant contracted to study the impact of SBA management as-sistance programs (see app. II) concluded that SBA's managementassistance programs can have a significant positive impact ontheir clients if the management resources are properly matchedwith particular client types. By doing this, the report pro-jected that SBA could triple the impact of its managementassistance.

Regarding the Call Contracting Program, the 1980 study foundit effective for experienced small business owners whose busi-nesses are relatively sophisticated and successful. However,according to the study, this type of client comprised only 14percent of all clients who received call-contracting assistance.On the other hand, the study showed that for 43 percent of theclients served under the program, the assistance had no impact.For these owners, the study concluded that other counseling serv-ices provided by MAD were more effective.

However, at the district offices we visited, no written cri-teria existed governing which management assistance resource--MADcounseling and training services or MSB/COD's 7(j) call contrac-tors (see ch. 1 for descriptions)--would be best suited or mosteffective for certain clients or for particular client problems.We found that SBA had provided no guidance at the district levelon how MAD and MSB/COD should coordinate their efforts to assurethat the most effective and least costly management assistanceresource is used to satisfy clients' needs. Our interviews withseven district officials indicated that the decision to use aparticular resource was usually made by the SBA official whooriginated the request. The basis for resource selection variedamong the district officials and included such factors as personalknowledge, urgency, and the availability of management resources.

8

In two districts, officials said staff in the two groups--MAD and MSB/COD--rely first on their own management assistanceprograms rather than refer tasks to other SBA resources. Forexample, two management assistance officers in MAD told us theygenerally give the highest priority to their own counselingservices because of the services' low cost. Other MAD officialsstated that referrals to MSB/COD for call-contracting help aremade only as a last resort. Two MAD officials, however, toldus they would not refer their clients to certain call contractorsbecause of the poor quality of services these call contractorshad provided in the past. MSB/COD officials, on the other hand,said they primarily use call contractors because they respondmore quickly to client needs than the other resources.

One district director said that program goals which requirethat each SBA group assist a certain number of clients each yearwas an influencing factor for using one's own resources over thoseof another group.

In our opinion, without a uniform system or method for coor-dinating management assistance programs and resources, SBA has noassurance that its limited management and technical resources arebeing allocated efficiently and effectively. We found severalexamples where the lack of coordinating management assistanceprograms or considering available outside resources resulted inthe inappropriate use of call contractors when other less costlyresources were available.

Example 1

In February 1981, the San Francisco district office issuedfive task orders totaling about $22,000 (120 staff days at $185per day) to a call contractor to study the impact on liquor re-tailers of California abandoning its fair trade laws. We notedthat SbA had conducted a similar study 2 years earlier at a costof $11,647 and the 1981 study was to update the 1979 information.The district director said the use of 7(j) funds for these studieswas appropriate because many small retail liquor stores are ownedby minorities who also have SBA guaranteed loans.

We believe a study of this type could have been completed byusing less costly resources. For example, the district officecould have used a volunteer group participating in MAD's SmallBusiness Institute Program. Under this program, faculty andgraduate students from various colleges and universities conductmanagement research and counseling services for small businessesat a fee of $250 per case as class projects.

A second alternative would have been for SBA to sponsor ajoint survey with the various beverage trade associations or Stateagencies that may have been interested in such a study. In thisconnection, we contacted an official with the California StateDepartment of Alcohol Beverage Control to determine whether that

9

agency had done any work in the area. We were told that a studysimilar to SBA's was done during the same time period. While theState study was not published, the data was available to any in-terested person or group. In fact, the 7(j) call contractor'sstaff obtained information from this agency on several occasions.This official said his agency would have considered joint sponsor-ship on a study with SBA, but SBA did not call.

We brought this issue to the attention of the San Franciscodistrict director. The director said that he was unaware of theState's study. The official agreed that a joint effort would havebeen less costly and more beneficial to all parties concerned.He said that in the future SBA will consider using alternativeresources such as this one before it selects a call contractorfor such a project.

Example 2

In 1980, a call contractor was used to provide a businessplan and loan packaging seminar. A major goal of the seminar,which cost $38,659, was for each participant to prepare a loanpackage. However, our analysis of the seminar results indicatedthe contractor had little success with this task.

The consultant did not adequately publicize the seminar, nor,according to SBA officials, did he perform the planned prescreen-ing of the program participants. As a result of the lack of ad-vance publicity, few people attended the seminar. In the end,the seminar was opened to all interested people even though theintended focus was to be on women who had done some preliminarywork toward opening a small business.

According to the consultant's report only 7 of the 13 parti-cipants actually put a loan package together. The other six werestill gathering the background information needed to start a busi-ness. Additionally, even though the consultant's report statedthat seven participants submitted loan packages at the end of theseminar, we were unable to verify this. We contacted one of theseparticipants who told us that she and her partner, who was alsocounted as having submitted a loan package, did not submit a pack-age because they did not think their business was feasible.

As part of the call contractor's cost proposal for conductingthe seminar, the firm was to

publicize and advertise the seminar $ 3,606

prescreen eligible participants 3,692

develop the course material 14,334

Total $21,632

10

Our review revealed that there was littie publicity or advertisingexpense incurred, and SBA does not know of any prescreening ofparticipants, yet SBA paid the call contractor for all requestedservices. When we brought this to the District Director's atten-tion, he said a letter would be sent to the contractor to havethose funds returned. In a May 5, 1981, letter to the consultant,an Assistant District Director requested that the consultant pro-vide an accounting of the advertising and publicity expenses in-curred for the women's seminar. After further discussion withour staff, the Assistant District Director also requested thatthe consultant provide SBA with an accounting of all expensesrelated to the seminar. As of June 25, 1981, the consultant hadnot responded to SBA's request. Also, we noted that while SBApaid the call contractor $14,334 to develop the course material,the district office did not retain a copy of this material whichcould be used for future seminars.

One management assistance officer, working with the callcontractor, said SBA did not have the inhouse resources to spon-sor such a seminar at the time. However, the Assistant DistrictDirector, MAD, told us that such a seminar was clearly within theDivision's capability, whether using inhouse resources or acquir-ing free outside consulting assistance through contacts in thesmall business community.

In our opinion, this seminar was poorly executed and couldhave been conducted with less costly management resources avail-able in the district office. Had the district office (1) providedthe course material, (2) publicized and advertised the seminar,and (3) prescreened the participants, it would have saved at least$21,632 of 7(j) funds.

Overall, these examples demonstrate the impact of SBA nothaving a plan or procedures which require district office staffcoordination to ensure that call contractors are used only ontasks for which they are well-suited and that inhouse resourcesor low-cost volunteer resources are used whenever possible. Inour opinion, SBA needs to develop procedures for systematicallyscreening all requests for management assistance. These p~oce-dures need to identify all types of assistance available, andspecify those situations and clients the assistance is best cap-able of helping. In this connection, SBA needs to consider des-ignating an individual as a focal point within each districtoffice who would receive all requests for management and techni-cal assistance. This individual could make an independent judg-ment as to whether the request could best be satisfied by MAD orMSB/COD and refer the request to the appropriate group.

DIFFERENCES IN TASK-DAY COSTSBETWEEN COMPETITIVE ANDNONCOMPETITIVE 8(a) CONTRACTS

We noted significant differences between task-day costs forcompetitive and noncompetitive 8(a) call contracts. In our sampleof 40 contracts for fiscal years 1978, 1979, and 1980, the task-day

11

rW

costs for SBA's noncompetitive 8(a) contracts have been, on theaverage, about 49 percent higher in those last 2 years than com-petitively awarded contracts for essentially the same types ofservices. The noncompetitive 8(a) method is used by SBA forawarding contracts to qualified consulting firms that partici-pate in the 8(a) program. On the other hand, the competitivemethod is used for awarding contracts to 8(a) and non-8(a) firmsthat otherwise meet SBA's guidelines for being a call contractor.

The following chart illustrates the differences in the aver-age task-day costs between SBA's competitive and noncompetitive8(a) call contracts over the past 3 fiscal years. Of particularimportance is the widening gap between the costs of the two typesof contracts, which shows that the competitive rate has decreasedover this period while the noncompetitive rate has increased.

Taskorder Contract Average Percent

Fiscal Number of days amount cost differ-year Contract contracts used spent per day ence

1978 Competitive 7 1,999 $ 346,924 $174 25.3Noncompeti-

tive 8(a) 6 2,103 457,522 218

1979 Competitive 4 1,512 252,518 167 41.9Noncompeti-

tive 8(a) 15 2,626 622,294 237

1980 Competitive 5 741 113,336 153 57.5Noncompeti-

tive 8(a) 3 193 46,566 241

Total 40 9,174 $1,839,160 $200

In one SBA region, the actual task-day cost differential variedwidely, ranging from as low as $123 per task-day for a competitivecontract to as high as $450 for a noncompetitive 8(a) contract.

In three of the four SBA regions where we conducted our re-view, we noted three instances where an 8(a) consulting firm wasawarded both a competitive and a noncompetitive call contract forthe same types of services. The chart below depicts these threeinstances and shows that a firm's task-day rates under the twotypes of awards can vary by as much as 100 percent.

Competitive Noncompetitive PercentFirm daily rate daily rate difference

A $116 $231 99.1B 119 238 100.0C 160 216 35.0

12

To determine the reasons for and the impact of differencesin daily rates between competitive and noncompetitive contracts,we interviewed selected contractors and SBA officials. We alsoconducted a telephone survey of 302 recipients of call-contract-ing assistance to determine their satisfaction with the assist-ance provided under both methods. In addition, we analyzed theaverage billable task days and average length of time it took tocomplete each task under each of the 40 contracts included inour sample.

We were told by three contractors, an acting SBA regionaladministrator, and other SBA officials that some competitivedaily rates may be unrealistically low. According to one SBAdistrict official, such rates do not allow contractors to obtainwell-qualified consultants, and clients thus may not be receiv-ing the quality of services they would under noncompetitivecontracts. One SBA official contends that contractors may makeup for the low rates by (1) extending the number of days per taskorder, (2) using less qualified consultants, or (3) providinguntimely assistance.

A senior MAD program analyst in SBA's New York region saidthe average consulting rate in the region was $200 per day andfirms with rates below the average tend to hire less capable con-sultants. The result of hiring less capable consultants, accord-ing to this official, is that lower quality management assistanceis provided. He said that noncompetitive contract rates nego-tiated in the region are more realistic than the competitivecontract rates awarded by the central office and these highernoncompetitive contract rates allow contractors to hire morequalified personnel. For this particular region, the averagetask-day rate for all noncompetitive contracts in fiscal year1980 was 48.6 percent greater ($214 versus $144) than theaverage task-day rate for all competitive contracts.

While SBA's contracting methods resulted in significant dif-ferences in task-day costs, on the average there was very littledifference in the number of days it took to complete the tasks.That is, there was no evidence that contractors who charged lowerrates under competitive awards took longer to complete tasks.Our analysis of the 40 contracts included in our sample showedthat the average number of days to complete a task under a com-petitive award was 6.1, while tasks performed under the noncom-petitive contracts took 6.8 days to complete.

The following table summarizes the results of our analysison the average number of days billed by the contractors selectedin our sample of 40 contracts.

13

Type of Number of Average daysFiscal year contract contracts billed per task

1978 Competitive 7 6.0Noncompetitive 6 6.4

1979 Competitive 4 7.0Noncompetitive 15 6.9

1980 Competitive 5 5.1

Noncompetitive 3 12.1

Total 40

Composite Competitive 16 6.1Noncompetitive 24 6.8

Total 40

Furthermore, our analysis revealed that the total length oftime it took from the issuance of a task order by SBA to task com-pletion by the contractor varied little between the types of con-tracts. The average number of calendar days from task request totask completion under the competitive contracts was 82 days whileunder the noncompetitive contracts the average was 79 days.

Finally, our analysis of client responses to our telephonesurvey of how clients perceived the usefulness of the assistanceprovided showed that the type of contract and the task-day ratewere not contributing factors in the client's acceptance and per-ceived usefulness of the assistance provided. In fact, the re-sponses showed that the clients were as satisfied with assistancereceived under competitive contracts as they were with assistancereceived under noncompetitive contracts.

In summary, the composite data from our analysis of the 40contracts showed little difference between the two contractingmethods in terms of the average number of billable days, the aver-age number of calendar days between task order request and taskorder completion, and perceived usefulness of advice provided bythe contractor. Thus, it appears that consultants working underthe lower competitive rates are not extending the number of bill-able days per task order nor are they taking longer to completetasks. The only significant difference between the two types ofcontract awards is that costs per task-day were much lower undercompetitive awards than under noncompetitive awards.

SUBCONTRACTORS WERE USED EXCESSIVELY

During the period covered by our review, SBA staff generallycould not tell which subcontractors actually performed work undercontracts they monitored nor the amount of work performed usingthis arrangement. SBA contracting procedures, among other things,require that a contractor perform at least 50 percent of the work

14

required under the contract using personnel from the firm'sexisting organization. Also, the contractor is to use personneldesignated in its proposal and, in cases of substitution, thecontractor must receive prior approval from SBA.

We were told by the former Director, Office of DevelopmentAssistance, that the 50-percent requirement (later, when 8(a) con-sulting firms began to participate, this requirement became 55percent for these firms) was initially instituted because SBAwanted to be sure that firms under contract to SBA develop andmaintain their own inhouse management and technical expertise andknowledge of the local small business community. He said SBA didnot want "contract brokers," people who may win contracts butthen subcontract to others who have unknown skills or experience.However, in practice, this requirement often was not met.

Of the 40 contracts we reviewed, 14 had subcontracting levelsabove the contract limitation, 20 were within the contract maxi-mums, and files for the remaining 6 were so incomplete at both SBAand the contractors' offices that we could not determine the sub-contracting level. In several of the 14 contracts, the subcon-tracting level was over 75 percent. For one noncompetitive award,a subcontractor performed all task orders we reviewed under thecontract. The following table shows the 14 contracts we reviewedwith subcontracting levels above 50 percent.

DaysNumber Task Days paid toof con- orders billed subcon-

Region tracts reviewed to SBA tractor Percent

II (New York) 4 182 1,696 1,052 62III (Philadelphia) 2 32 195 180 92V (Chicago) 3 127 507 333 66IX (San Francisco) 5 263 1,195 809 68

Total 14 604 3,593 2,374 66

Overall, we found that SBA district office staff did notfollow SBA contracting requirements. Local staff generally didnot know who actually performed the consulting work nor thelevel of subcontracting performed under each of the contracts.In our opinion, placing a limitation on the subcontracting levelis a good one. We agree that it is important for contractors tomaintain an inhouse technical and managerial capacity to aidsmall businesses. Also, this requirement provides some degreeof assurance that the person performing the work has some meas-ure of experience and knowledge aIout problems peculiar to smallbusinesses.

CLIENT SATISFACTION WAS MIXED

In our view, an important measure of contractor success isthe value of the advice the contractor offers to the client.

15

SBA also recognized this need for feedback and requires in itsstandard operating procedures that such followup take place anda written report be placed in the client's file. However, only54 percent of the 302 clients we interviewed said SBA contactedthem about the results of the contractor's work. Thirty-fourpercent said SBA did not contact them, 11 percent were uncertainif SBA followed up, and the remainder did not respond.

To get some measure of the value of advice given by 7(j)call contractors, we attempted to randomly contact at least 10clients from each of the 40 call contracts we reviewed. We wereable to obtain 302 completed client interviews using this tech-nique. Appendix III summarizes client responses to key questionscontained in the interview form.

Among other things, we wanted to measure: (1) the time ittook for a client to receive a final report, (2) the perceivedusefulness of the consultant's advice, (3) the amount of adviceactually implemented, and (4) if needed, would the client recom-mend or use that consultant again.Report time varied

Fifty-two percent of the clients we interviewed said theyreceived the report within 1 month after their last contact withthe consultant. Another 21 percent said they received a reportbetween 1 and 2 months, 7 percent said it took from 2 to 4 months,and 3 percent said it took over 4 months. The remaining 17 per-cent did not remember how long it took.

Perceived usefulness andamount of advice implemented

A key objective of our interviews was to determine, from theclient's viewpoint, the value of the consultant's advice. In thisconnection, we asked how useful the consultant's written reportwas to the client. Only 34 percent said the report was of verygreat or great value. Another 30 percent said it was of moderateor some use, while 23 percent indicated the report was of littleor no value. Thirteen percent did not respond to the question.

In a related question, we attempted to determine how muchof the advice the client tried to implement. The results weresimilar to those obtained from our question on the value of thewritten report. Thirty-four percent of the clients attempted toimplement all or most of the advice, 25 percent attempted to im-plement half or less of the advice offered, and 19 percent saidthey tried little or none of the advice provided. Twenty-twopercent did not respond.

Would they use the consultant again?

To determine the clients' perceptions of the consultant'sworth, as separate from the other issues, we asked two related

16

If

questions: (1) would the client recommend that consultant to asmall business associate and (2) would the client request thesame consultant again if advice were needed in the future?

The responses to the two questions were similar. About 68percent of the clients said they would probably or certainly usethe same consultant again or recommend the consultant to theirassociates. Another 7 to 10 percent were uncertain if they woulduse the consultant again or recommend the consultant to anotherassociate. Twenty-five and 21 percent, respectively, said theyprobably would not or certainly would not use the consultant orrecommend the consultant to associates. One percent did notrespond to the two questions.

In summary, the responses to our questionnaire by 302 re-cipients of 7(j) consultant services were mixed. Less than 35percent of the clients thought the consultant's report to be ofvery great or great value, but 67 percent said they would orprobably would use the same consultant again. Only 34 percentof the clients tried to implement all or most of the adviceprovided, but most would recommend the consultant to businessassociates. About one-third said they were not contacted bySBA after the task order was completed.

CONCLUSIONS

The Call Contracting Program has not been effectively ad-ministered in the regions and districts covered by our review.As a result, program funds have not been used in the most effi-cient manner, leading us to conclude that fewer clients receivedmanagement and technical assistance than would otherwise havebeen possible. In addition, nonadherence to established proce-dures resulted in call contractors making excessive use ofsubcontractors.

SBA used call-contracting services when less costly resourceswere available. This occurred because of a lack of coordinationbetween MAD and MSB/COD to assure that the least costly and mosteffective resources were used. We believe SBA needs to developprocedures for systematically screening all requests for manage-ment assistance. These procedures need to identify the types ofassistance programs available and specify those situations andclients these programs are best capable of helping. In this con-nection, SBA could designate a qualified individual in each dis-trict office as a focal point who would (1) receive all requestsfor management and technical assistance, (2) make an independentjudgment as to whether the request could best be satisfied by MADor MSB/COD, and (3) refer the request to the appropriate group.

To ensure that it provides management and technical assist-ance to the maximum number of clients with its limited programfunds, SBA needs to assure that it uses the least costly sourceof qualified services. Our client survey results showed that the

17

quality and timeliness of work performed by contractors that re-ceived competitively awarded contracts was about the same as thatof 8(a) contractors that received noncompetitive contracts. Thecost to SBA of work performed under noncompetitive contracts was,however, about 49 percent higher over the past 2 years than undercompetitively awarded contracts. We believe SBA needs to set amaximum task-day cost allowable under noncompetitive contractsfor various types of services.

In addition, SBA has not always adhered to its contractingrequirements which state that a call contractor must perform atleast 50 percent of the work under a call contract using its ownpersonnel as opposed to using subcontractors. SBA's objective isto make sure that its contractors develop and maintain inhousemanagement and technical expertise and knowledge of the smallbusiness community. If SBA is to satisfy this objective, itmust do a better job of monitoring the performance of its callcontractors.

On the other hand, many of the clients we interviewedthought the advice they received from the call contractors wasof value. Over half of the clients said they would request thesame consultant again if they needed help in the future. Ourconcern in this area is that SBA did not follow up with at least34 percent of the clients after task-order completion and, there-fore, SBA really did not know which contractors or subcontractorswere fulfilling client needs. In our view, this feedback iscritical to SBA for use in evaluating future contract proposals.

RECOMMENDATIONS

We recommend that the Administrator, SBA, direct theAssociate Administrator, Minority Small Business and CapitalOwnership Development, to:

--Develop procedures for systematically screening allrequests for management assistance which identifythe types of assistance programs available and thesituations and clients these programs are best cap-able of helping. One means of accomplishing thiswould be to designate a qualified individual in eachdistrict office to receive and evaluate all requestsfor management and technical assistance and referthem, as appropriate, to MAD or MSB/COD.

--Establish a maximum task-day cost allowable undernoncompetitive 8(a) contracts for various types ofcall-contract services.

--Direct regional and district offices to followexisting agency procedures for

(1) assuring that call contractors are notexceeding SBA subcontracting limitsand

18

(2) obtaining feedback on client satisfaction

with services provided by call contractors.

SBA COMMENTS

SBA's response to our recommendations was positive. SBAcommented that its guidance to the regions for fiscal year 1982addresses the need for better coordination at the District Officelevel between Management Assistance, Financial Assistance, andMSB/COD officials. In addition, SBA informed us that revisedStandard Operating Procedures, expected to be issued in September1981, will: (1) establish maximum allowable task-day costs and(2) ensure that subcontracting limits are not exceeded and feed-

back is obtained regarding client satisfaction. (See app. IV.)

19

A

CHAPTER 3

SBA NEEDS TO IMPROVE ITS

MANAGEMENT OF THE 7(j)(10) PROGRAM

In response to criticisms about the inadequate level ofmanagement and technical assistance being provided to 8(a) firms,the Congress created the 7(j)(10) program in October 1978 to sup-plement assistance already available to 8(a) firms with the ex-pectation that these firms would begin to receive the intensiveprofessional management and technical assistance needed to developinto viable businesses. We found, however, that SBA has not de-veloped an overall plan or strategy for administering the 7(j)(10)program nor has it established specific program goals or objec-tives. Consequently, the program lacks direction and no adequatebasis exists to assess results. Also, in reviewing projectsawarded by SBA's central office under the program during fiscalyears 1979 and 1980, we found that

--several were awarded outside the 7(j)(10) program'slegislative objectives;

--others were awarded for large dollar amounts whichbenefited only one 8(a) firm, thereby limiting thenumber of firms that could have been served by theprogram; and

--still others were awarded to perform functionsSBA should perform inhouse.

In addition, SBA's central office did not adequately monitorand evaluate contractors' performance in fiscal years 1979 and1980. In our opinion, this problem was attributable to the lackof procedures or guidelines that describe and assign monitoringand evaluation responsibilities.

SBA has addressed some of these shortcomings; however, addi-tional administrative actions are needed to better ensure thatthe program's legislative objectives are achieved.

PROGRAM PLANNINGHAS BEEN INADEQUATE

As stated in chapter 1, Public Law 95-507 vested the man-agement of the 7(j)(10) program with the Associate Administratorfor Minority Small Business and Capital Ownership Development(MSB/COD). One of MSB/COD's mission statements calls for the de-velopment of an overall plan for administering the 7(j)(10) pro-gram, including criteria for identifying and selecting projectseligible for program funding. Our review, however, disclosedthat MSB/COD officials have not developed an overall plan foraccomplirhing the program's legislative objectives. The impor-tance of program planning, steps critical to its implementation,

f 20

and specific planning deficiencies which we identified regardingthe 7(j)(10) program, are discussed below.

Planning is a basic element of the management process for anyprogram. It involves (1) defining program goals and objectivesin relation to legislative intent, (2) setting and implementingpriorities to achieve these goals and objectives, and (3) measur-ing the results through organized, systematic feedback. Planningcontributes to management effectiveness by, among other things,providing a framework for decisionmaking and specific account-ability for results.

For program planning to be effective several steps must befollowed. These include:

--First, establishing specific goals and objectiveswhich should guide overall agency policy in imple-menting the program through its applicable organiza-tional components.

--Second, setting and implementing priorities forachieving program goals and objectives. Because oflimited pvogram resources it is imperative that pro-gram funds concentrate on what is important. Withoutpriorities, program resources may be scattered overa broad range of activities and, therefore, may notbe coherently addressing specific program goalsand objectives.

--Third, establishing a method for systematicallymonitoring and evaluating program results. Feedbackon performance is critical in determining whetherresources have been effectively allocated andprogram goals and objectives are being achieved.

In our judgment, the most critical deficiency in SBA'sadministration of the 7(j)(10) program has been its failure todevelop a comprehensive plan for accomplishing the program'slegislative objectives and to establish program goals, objectives,and priorities. As a result, program funds have been spent on awide variety of activities, many of which we question. In addi-tion, responsibilities of key program officials charged withmonitoring and evaluating contractors' performance were not welldefined during the program's first 2 years. These problems arediscussed below.

Lack of program plan resultsin subjective funding decisions

In the absence of a program plan, we asked SEA's DeputyAssociate Administrator, MSB/COD, as well as the Director ofMSB/COD's Office of Development Assistance, what criteria wereused to allocate the $8.5 million in 7(j)(10) funds between SBA'scentral and regional offices in fiscal years 1979 and 1980 (see

21

IIIt

p. 2). These officials stated that allocation decisions weremade by MSB/COD's former Associate Administrator and SBA's formerDeputy Administrator. They said they were generally not aware ofwhat, if any, criteria were used by these former officials to makethese allocations. Furthermore, they could not provide us withany documentation that indicated program funds were allocated inaccordance with specific goals or objectives.

Our inability to identify the basis for the allocation offunds is indicative of SBA's inadequate program planning. Themore serious consequences of inadequate planning, however, aredemonstrated by our review of how the central office used itsshare of the 7(j)(10) funds. As shown on page 2, the centraloffice retained about half of the $8.5 million allocated to the7(j)(10) program in fiscal years 1979 and 1980. These funds wereobligated to fund 27 contracts which, with one exception, wereselected from more than 100 unsolicited proposals. This exten-sive use of unsolicited proposals permitted outside organiza-tions to greatly influence program direction and policy.

SBA justified its approach of awarding contracts on the basisof unsolicited proposals in an August 1979 memorandum which statedthat :

"* * * Although this act [Public Law 95-5071 was

passed in October, 1978, the agency has just now com-pleted its internal reorganization * * *. Because ofthis, we are unable to complete a formally advertisedprocurement to acquire those services prior toSeptember 30, 1979 * * *.

"In FY 80, we propose to procure all required7(j)(10) services through competitively advertisedprocurements. It should therefore be noted thatthis effort is one-shot only and will not reocurr.* * *." (Bracketed information provided by GAO.)

However, contrary to this statement, SBA continued its practiceof fulfilling 7(j)(10) program requirements in fiscal year 1980through the use of unsolicited proposals.

Aside from relying on unsolicited -oposals, senior MSB/CODofficials were unable to adequately explain the criteria used toselect the 27 projects from among the proposals received. We weretold that 22 of the projects were selected jointly by SBA's formerDeputy Administrator and MSB/COD's former Associate Administratorwithout input from other MSB/COD officials. In selecting theremaining five projects, the former Associate Administrator,MSB/COD, relied on an internal evaluation committee to identify,from among the unsolicited proposals, those organizations thatappeared capable of providing the following types of assistanceon a national basis: (1) development of new business opportuni-ties, (2) financial management, (3) loan packaging and businessplanning, (4) construction management, and (5) surety bonding.

22

These forms of assistance are generally consistent with thoseauthorized by the legislation.

We reviewed the contract files for all 27 projects to deter-mine whether the scope of work seemed to be consistent with thelegislative objectives of the program and found that in 15 casesit was. However, because these projects covered a variety ofactivities we were unable to identify any consistent programtheme. Rather, the contracts seemed to move the program inscattered directions. For example, some contracts were awardedto provide management assistance directly to 8(a) firms. Otherswere awarded for research projects such as a $120,000 contract toanalyze Federal procurement opportunities and identify productssuitable for 8(a) contracting. Still others were awarded thathad a private sector orientation such as a $100,000 contractawarded to an association to encourage large corporations to es-tablish minority enterprise investment companies.

Aside from our concern regarding the overall direction ofthese 15 contracts, we have reservations regarding the proprietyof the remaining 12. These are discussed in the followingsection.

MANY CONTRACTS CONTRIBUTEDLITTLE TO PROGRAM OBJECTIVES

In our judgment, 12 of the 27 contracts did not effectivelyfurther the program. Problems associated with the 12 contractsfall into three categories:

--Projects which appear to be outside the legislativeobjectives of the 7(j)(10) program.

--Costly projects which benefit only one or a few firms.

--Projects which SBA should be performing inhouse.

On the following pages, we discuss 9 of the 12 questionablecontracts as examples of the three major problem areas statedabove.

Contracts outside the program'slegislative objectives

Although the funds SBA allocated to the 7(j)(10) program wereintended to be used for the purposes of that program--to provideservices exclusively for 8(a) firms--SBA made three awards to or-ganizations which had little or no relationship to 8(a) firms.While these awards did not further the purposes of the 7(j)(10)program, they did fall within the purposes of 7(j)(1-9). Sincefunds are appropriated for 7(j) and allocated by SrA to the7(j)(1-9) and 7(j)(10) programs, the use of 7(j)(10) funds forthese awards is a matter of agency policy and management. Theseawards are discussed briefly on pages 24 and 25.

23

Example 1

SBA approved a $200,000 grant to the city of Buffalo, NewYork, on April 23, 1980, to fund a Labor Surplus Area Demonstra-tion Outreach Project and assigned the responsibility for theday-to-day administration of the grant to the Associate Admini-strator for Procurement Assistance. The project's primary objec-tive was to reduce unemployment and underemployment in Buffalo.It was expected that by increasing Government contracting withBuffalo firms, employment in the area would correspondingly in-crease. Accordingly, the grant specified that the city woulddevelop a data base of Buffalo area firms from which 15 firmswould be identified as having an immediate capability to suc-cessfully bid on Government contracts.

As of June 1981, a data base of 87 firms had been identified.Instead of selecting only 15 firms as planned, SBA agreed to allowthe city to work with all the firms. When asked how many 8(a)firms were included in the data base, an assistant to the Asso-ciate Administrator of the Procurement Assistance Division toldus he did not know because the project's focus was not 8(a) firms;consequently, the number of 8(a) firms which participated in orbenefited from this project was of little importance. Our com-parison of the names of the 87 firms included in this project'sdata base with an SBA listing of 8(a) firms located in the Buf-falo area about the time this grant was awarded revealed that no8(a) firms were included in the data base. I/

The Associate Administrator for Procurement Assistance toldus that this project was outside the scope of the 7(j)(10) pro-gram. According to him, 7(j) funds were used because they werethe only funds available at the time.

Example 2 e

SBA awarded a contract in April 1980, for $26,860 to theNational Center for Urban Ethnic Affairs. The primary objectiveof this contract was to stimulate commercial revitalization inurban neighborhoods by making community organizations and localbusinessmen aware of SBA's programs. To accomplish this objec-tive, the center conducted three regional conferences in Washing-ton, D.C.; Chicago, Illinois; and Eugene, Oregon; and a nationalconference to acquaint neighborhood revitalization specialistswith SBA programs. Participants at the conferences were askedto make recommendations on ways that both SBA and neighborhooddevelopment organizations could improve revitalization efforts.The results of the conferences were summarized in an October 1980report prepared by the center.

I/There were only five 8(a) firms in the Buffalo area as ofMarch 1980, about 1 month before the contract was awarded.

24

In reviewing the contract and the final report prepared bythe center, we found that no reference was made to 8(a) firms.In addition, the SBA official responsible for evaluating thecontract stated that this contract had no relationship to the7(j)(10) program at all.

Example 3

On September 30, 1980, SBA awarded a $100,000 contract on thebasis of an unsolicited proposal to a New York consulting firm.The purpose of this contract was to provide technical and advisoryassistance to U.S. minority firms interested in expanding theirbusinesses in Africa or other third world countries. The con-sultant's proposal stated that companies which seek new businessventures in Africa require a wider range of advisory services inthe start-up phase than in most other parts of the world; there-fore, an informed source such as his firm was needed to interpretevents on the African continent in a manner understandable tothose contemplating new business ventures there.

Our review of the contract file showed that the proposalsubmitted to SBA made no correlation between interest of 8(a)firms and the contract's objectives. In addition, the DeputyDirector, Office of Development Assistance, told us his office hadno data on the level of interest 8(a) firms had in developing newbusinesses in Africa. We also found that about half of the con-tract amount--$48,000--was reserved for the contractor to attenda third world exposition in China and other travel relatedexpenses.

SBA procedures require a cost accounting audit on contractsexceeding $100,000. In accordance with this requirement, inJanuary 1981, SBA attempted to review this contractor's recordsbut was unable to verify even the existence of the firm. Conse-quently, the contract was canceled and no funds were spent.Although the contract was canceled, we believe SBA should havequestioned, in the beginning, whether this project was withinthe framework of the 7(j)(10) program.

Contracts made for large dollaramounts where benefits werelimited to one or a few firms

Aside from awarding contracts outside the scope of the7(j)(10) program, six were made for large dollar amounts whichbenefited only nine 8(a) firms. Given limited program resources,such contracts obviously restricted SBA's ability to service agreater proportion of the 1,800 to 2,100 firms which participatedin the 8(a) program during fiscal years 1979 and 1980.

We found that SBA had no written policy concerning the amountof management and technical assistance which should be made avail-able to individual 8(a) firms. In addition, we noted severalcases where large sums were spent to assist just a few firms.

25

For example, during fiscal year 1980, two 8(a) firms (represent-ing one-tenth of 1 percent of the firms in the 8(a) program)received assistance totaling almost 28 percent of the $2 millionallocated to the central office for the 7(j)(10) program. Wewere told that substantial assistance was provided to these 8(a)firms because they were candidates to receive sizable Federalcontracts under the 8(a) pilot program I/ and consequently, theamount of assistance they received was Tustified in relation tothe contract amounts. In our opinion, however, the heavy concen-tration of assistance for only two firms created a wide disparitybetween assistance available to the two firms and the other 2,100firms in the 8(a) program. Details of the assistance provided tothese two firms are summarized below.

Example 1

SBA awarded a $100,000 7(j)(10) contract in May 1980 to aNew Jersey consulting firm. Although the consultant was askedto provide management assistance to 8(a) firms in general, theprimary objective of this contract was to assist one particular8(a) firm in resolving problems it was experiencing in renderingcomputer services to a Federal agency. SBA also requested theconsultant to report on the feasibility of this particular 8(a)firm acquiring an existing micrographic business. 2/ Part ofthe computer services this firm was providing to t*e Governmentagency related to the micrographics industry.

The consultant reported that acquiring the micrographicbusiness as well as converting the 8(a) firm totally into thisindustry were viable options if SBA was willing to commit sub-stantial financial, technical, and professional assistance to thefirm. SBA agreed to provide the necessary assistance and modi-fied the scope of work to require the consultant to assist the8(a) firm in reorganizing its management and redesigning itsbusiness plan to reflect the transition from a computer servic-ing business to a micrographics producing business. This modi-fication increased the contract amount from $100,000 to $295,000.

In addition to the $295,000 contract, SBA awarded a $100,000contract in June 1980 to a second consulting company which hasassisted only the 8(a) firm described above. According to the

1/Unlike the regular 8(a) program where Federal agencies volun-tarily set aside contracts for program participants, the pilotprogram's legislation authorizes SBA to demand 8(a) contractsfrom a Federal agency selected by the President. The Depart-ment of the Army was selected as the pilot agency on January 30,1979.

2/Micrographic production entails filming large amounts of infor-mation so that it can be stored, retrieved, and delivered in anefficient manner.

26

Ad

Deputy Associate Administrator for Business Development, becausethe 8(a) firm had only limited experience in the micrographicsindustry, this contract was intended to provide it with technicalsupport. This contract was also intended to assist any other8(a) firms in the micrographics field.

Although the scope of work for both contracts indicated thatthe contractors could serve a number of 8(a) clients, as of April1981, all services had been provided exclusively to the one 8(a)firm described above. Overall, not only had SBA awarded two7(j)(10) contracts for almost $400,000 which benefited this 8(a)firm, but it also provided the 8(a) firm with about $1.5 millionin other financial aid, including a $650,000 loan and $850,000for business development expenses. Funds provided 8(a) firms forbusiness development expenses generally do not have to be repaidand are to be used for the purchase of capital equipment neces-sary for efficiency and growth.

Responding to our questions concerning SBA's :ationale fortargeting such a large amount of money to one firm, the DeputyAssociate Administrator for Business Development, who was re-sponsible for the day-to-day administration of these contracts,explained that SBA had envisioned helping other 8(a) firms but,no other firms requested assistance. Nevertheless in his opinion,the assistance given to the 8(a) firm was justified because fore-casts for the micrographics industry indicated that it had ex-cellent growth potential and SBA believed the 8(a) firm had thecapability to develop and succeed in this industry. Since re-ceiving the management and financial assistance from SBA, thefirm, as of April 1981, had received only one 8(a) contract forabout $400,000.

Example 2

Because it had been unsuccessful in obtaining timely andcomplete financial data, SBA contracted with an accounting firmin March 1980 at a cost of $83,150 to audit the financial state-ments of an 8(a) fuel oil distributing company. SBA had informedthe 8(a) company in January 1980 of its intention to award theaccounting contract and notified it again, in April 1980, thatthe services had actually been obtained and to expect a meetingwith the auditors. This contract was originally to expire by May31, 1980, however, by August 1980, the 8(a) firm still had notaccepted the accounting assistance and the owner had indicatedthat he preferred to obtain services from another accountingcompany at his own expense.

Although the contract period was extended several times toMarch 1981, the 8(a) firm did not accept the accounting assist-ance. SBA finally closed the contract in April 1981. Since thefunds had been obligated during fiscal year 1980 but not spent,they were returned to the U.S. Treasury and lost to the program.

2

Contracts were awardedto perform functions SBAshould perform in-house

In our judgment, SBA supplemented internal resources byawarding three contracts in fiscal year 1919 to perform functionswhich it should have performed itself. Wt discussed these con-tracts with senior MSB/COD officials and other SBA staff responsi-ble for monitoring the contracts. We were told that the contractswere selected on a subjective basis and that no documentationexisted to support the awards.

We have criticized various Federal agencies for using con-sulting services to perform work that should have been performedin-house. For example, in a March 1980 report on I1 consultingservice contracts, I/ awarded by six Federal agencies, we ques-tioned the need for many of the contracts because (1) little orno consideration was given to in-house capability before awardingthe contracts and/or (2) frequently little use was made of thestudies' result. Similarly, the President, in a May 1977 memo-randum to all executive branch agencies, requested that they stop"without delay" the use of consultants to perform work of a poli-cymaking or managerial nature which should be performed directlyby agency officials. The President's concerns were later reflectedin Office of Management and Budget Bulletin 78-11 dated May 5,1978. This bulletin prohibits the use of consulting services inperforming work of a policy/decisionmaking nature which is thedirect responsibility of agency officials.

In our opinion, the three contracts cited below are of apolicymaking or managerial nature which should have been performedby SBA staff. These three contracts totaled about $313,000, or 16percent, of the 7(j)(10) funds allocated to the central office infiscal year 1979.

Example 1

On September 28, 1979, SBA awarded a $124,890 contract toan 8(a) consulting firm to assist SBA personnel in establishingcriteria concerning entry into and graduation from the 8(a) pro-gram. While it is generally recognized that an individual maybe at a social disadvantage because of race or national origin,economic disadvantage is more difficult to assess. Consequently,SBA requested this consultant to develop guidelines for determin-ing when a firm is economically disadvantaged and, thus, eligiblefor 8(a) approval. In addition, the consultant was asked to de-velop a method for determining when an 8(a) firm has become com-petitive and viable in its industry and, therefore, should begraduated from the 8(a) program.

l/"Controls Over Consulting Service Contracts At Federal AgenciesNeeds Tightening" (PSAD-80-35, Mar. 20, 1980).

28

The final contract amount was increased to $153,000 becauseSBA expanded the scope of work by requiring the consultant toobtain feedback from 8(a) program personnel and 8(a) companieson the completed guidelines and to train SBA district officialswho would be ultimately responsible for implementing them. OnSeptember 30, 1980, the consultant submitted a final report toSBA which contained 8(a) program eligibility and graduationguidelines.

According to a senior MSB/COD official who was responsiblefor the daily administration of this contract, SBA did not havethe inhouse expertise necessary to perform the scope of work re-quired in this contract, and the final product was extremely welldone. However, this official also told us that although SBA re-ceived the report in September 1980, as of June 1981 no formalactions had been taken to adopt the guidelines because of per-

sonnel changes at the SBA Administrator and MSB/COD AssociateAdministrator levels--key individuals responsible for theprogram.

Although we believe the consultant's final report was con-

sistent with the contract terms, the contract itself was contraryto the intent of the Office of Management and Budget Bulletin78-11 which prohibits the use of consultants to perform work ofa policy/decisionmaking nature.

Example 2

On September 28, 1979, SBA awarded a $60,263 contract to aconsulting firm to develop a manual on the 8(a) program. Thepurpose of the manual was to explain to minority firms

--what the 8(a) program is--its purpose and goals;

--how the 8(a) program works--the approval, marketing,and development processes;

--what a minority firm can expect from SBA; and

--what SBA expects from 8(a) firms.

However, before this contract was awarded, SBA issuedstandard operating procedures which established policies, proce-dures, requirements, and guidelines for all activities withinMSB/COD, including the 8(a) program. The procedures became ef-fective on September 4, 1979. We compared these procedures withthe contractor's scope of work and found much duplication. More-over, our comparison of the completed manual with the publishedprocedures showed the manual essentially condensed and offered asimplified explanation of the 8(a) process as described in thestandard operating procedures.

In ouL opinion, SBA could have used information readilyavailable in the standard operating procedures and prepared the

29

manual inhouse. The SBA official responsible for monitoringthis contract agreed that SBA had the inhouse technical capabil-ity to develop the manual, but stated that due to limited manpower,a consultant was hired. According to him, the manual receivedvery limited distribution to the general public and even SBA re-gional staff. He also said that the manual is now obsolete be-cause it does not reflect revisions to the 8(a) program containedin Public Law 96-481 which became effective October 21, 1980.

Example 3

SBA awarded a consulting firm a $99,334 contract, on Septem-ber 28, 1979, to study and redesign the procedures used to admitfirms to the 8(a) program. The study was to specify the elementsof the existing system; describe its operation at the national,regional, and district levels; identify system impediments; andrecommend corrective action.

We were told by MSB/COD's Director, Office of Eligibility,who was responsible for monitoring this contract, that althoughthe agency had the in-house capability to perform the work doneby the consultant, it probably did not have the time. The con-tractor's final report, which was issued in February 1980, con-tained 27 recommendations aimed at improving the applicationprocess. By June 1981, SBA had fully or partially implemented15 of these recommendations; however, the remaining 12 had notbeen implemented because SBA considered them to be inappropriateor impractical.

INADEQUATE MONITORING OF7(j)(10) CONTRACTS

SBA's central office did not adequately monitor contractswhich it awarded under the 7(j)(10) program in fiscal years 1979and 1980. We believe this resulted from the lack of proceduresdescribing the duties of individuals responsible for monitoringthese contracts. Because they did not have a clear understandingof their duties and responsibilities, SBA lacked adequate infor-mation concerning contractors' performance.

The Office of Development Assistance, which organizationallyfalls under the Associate Administrator for MSB/COD, is chargedwith procuring 7(j)(10) services from selected organizations.This office had a professional staff of four and the Office Di-rector served as the primary contracting officer. Although theDirector was ultimately responsible for the day-to-day managementof the 27 7(j)(10) contracts awarded during fiscal years 1979 and1980, other Office responsibilities necessitated that he delegatecertain contract administrative functions to other MSB/COD offi-cials outside his office. Although these officials had no au-thority to modify the contract terms or make payment to the con-tractor, their primary function was to monitor and evaluate thetechnical performance of contractors SBA hired. Consequently,

30

these individuals were generally called contracting officers'technical representatives (COTR).

We spoke with 10 COTRs and several other key MSB/COD offi-cials responsible for 24 of the 27 contracts to clarify the scopeof their work and to determine the contract results. Some COTRstold us that they were responsible for ensuring that the contrac-tor provided the services spelled out in the contract. Otherstold us their principal responsibility was to receive contractinvoices and progress reports which they used as the basis forrecommending payment to the contractor. We found several otherinstances where COTRs were generally unaware of what duties theywere expected to perform. On two contracts, for example, whereSBA records indicated that an employee had been designated as theCOTR, our talks revealed that this individual was unaware of thisdesignation. Also, when asked how they were notified of theirCOTR status, responses varied from getting a written notice, toreceiving an oral briefing, to receiving no notification at all.

Because no written guidelines existed describing the dutiesand responsibilities of COTRs when contracts were awarded, COTRsusually had nothing more to rely on than their own personal judg-ment. To correct this problem, interim guidelines were issued inDecember 1980 clearly defining the COTRs duties. According tothe guidelines, the COTR is to provide technical guidance anddirection and assume responsibility and accountability for thetechnical adequacy of the work performed under 7(j)(10) contracts.The guidelines state that to monitor contractor's performance thefollowing factors should be considered when selecting a COTR:

--The individual's demonstrated interest.

--The individual's technical knowledge of the subjectmatter.

--The amount of time an individual can devote to themonitoring duties.

In addition, the guidelines outline specific responsibilitiesof the COTRs during contract performance.

We believe that the guidelines are sufficiently definitive,and if properly implemented should ensure that employees desig-nated as COTRs have the technical expertise needed to adequatelymonitor and evaluate contractors' performances. To ensure thatthese interim guidelines remain an integral part of the progrem'sadministration, we believe they should be incorporated into theprogram's standard operating procedures which are currently beingrevised.

RECENT SBA ACTIONS

In addition to issuing interim guidelines regarding COTRs,SBA has taken other recent actions to improve the management of

31

the 7(j)(l0) program. For example, a committee of five seniorMSB/COD officials was established in November 1980 to formulateprogram policy and establish criteria for funding decisions. Aspart of its duties, the committee was responsible for determiningthe merit, impact, and benefit of 7(j)(10) proposals and advisingon the allocation of fiscal year 1981 program funds. Accordingto one of MSB/COD's Deputy Associate Administrators, the commit-tee was needed to ensure that future 7(j)(10) projects providebenefits which favorably affect a majority of 8(a) firms ratherthan continue the past practice of giving large amounts of assist-ance to only a few firms. Although the committee serves only asan advisor to the Associate Administrator, MSB/COD, because itsrecommendations reflect the input of senior MSB/COD officials, webelieve it can be effective in improving the program's admini-stration by developing program policies and project selectioncriteria. The committee does not, however, represent a substi-tute for an overall program plan.

In November 1980, SBA also established new procedures re-quiring the regions to formulate an advance estimate of fiscalyear 1981 7(j)(10) funding needs. The data collected focused onmonetary requirements as well as assessed regional needs in termsof the kinds of assistance or services 8(a) firms needed. In ouropinion, because SBA regions are required to relate data on fund-ing requirements with data on the actual type of assistance 8(a)firms need, the central office can now bettez ensure that pro-gram funds are allocated to the regions in acc. :dance with pro-gram needs and priorities.

CONCLUSIONS

SBA has not established a plan for administering the 7(j)(10)program which (1) defines program goals and objectives in relationto its legislative mandate, (2) sets priorities to achieve thesegoals and objectives, and (3) measures results through organized,systematic feedback. While this program deficiency can be attrib-uted in part to the newness of the 7(j)(10) program, the continuedabsence of a program plan has been caused, in our opinion, bySBA's failure to emphasize planning as a basic program function.

The absence of a program plan has had repercussions on SBA'sadministration of the 7(j)(10) program. Specifically, the lackof planning has weakened the overall administration of the pro-gram, leading to subjective funding decisions and a reliance onunsolicited proposals to satisfy program requirements. The lackof planning and the inherent failure to define and rank programgoals and objectives have also contributed to the award of con-tracts which seem to move the program in scattered directions andwhich have not been adequately monitored by SBA. Finally, innumerous cases, the absence of a 7(j)(10) program plan resultedin the expenditure of limited program resources for questionablepurposes.

32

.o.~

To improve this situation the SBA Administrator, and keyofficials within MSB/COD, must emphasize the importance of plan-ning and make a commitment to implement planning as an integralpart of the 7(j)(10) program. Also, after committing itself toplanning, SBA must establish a structure in which it can occur.This could be accomplished through the recently created 7(j)committee.

RECOMMENDATIONS

To establish an effective planning process as a basic andintegral part of SBA's 7(j)(10) management strategy, we recommendthat the Administrator, SBA, direct the Associate Administrator,MSB/COD, to:

-- Define and rank (1) 7(j)(10) program goals and objectivesconsistent with the program's legislative mandate, (2)the number and needs of program participants, and (3) theavailability of 7(j)(10) resources. The 7(j) committeerepresents an excellent structure for accomplishing this.

-- Develop a written plan describing how program resourceswill be used. This plan should be compatible with theagency's defined program goals and objectives.

-- Revise the 7(j)(10) standard operating procedures toclarify

-- the criteria and process for the allocation of7(j)(10) program resources,

-- the criteria for 7(j)(10) project selection, and

-- the responsibilities of individuals charged withcontract monitoring.

SBA COMMENTS

SBA stated that it agreed with our recommendations and hasinitiated corrective action. More specifically, SBA stated thatit has begun to define and prioritize 7(j)(10) program goals andobjectives as well as develop a written program plan. SBA alsostated that the revised Standard Operating Procedures, scheduledfor issuance during September 1981, will clarify the 7(j)(10)

allocation process and the duties of contract monitors. SBAalso commented that future 7(j)(10) projects will be selectedthrough competitive cooperative agreements instead of throughsole-source procurements. (See app. IV.)

33

CHAPTER 4

SCOPE AND METHOD OF THE REVIEW

We conducted our review at SBA's New York, Philadelphia,Chicago, and San Francisco regional offices and at eight districtoffices located in those regions. Work was also performed atSBA's central office in Washington, D.C.

We interviewed SBA officials responsible for the 7(j) pro-grams in the central office. These included: the Associate Ad-ministrator for Capital Ownership Development and his assistants;the Director, Office of Development Assistance; and the ChiefCounsel for Special Programs. In the four regional and eightdistrict offices, we interviewed assistant regional administra-tors, district directors and assistant district directors, vari-ous management assistance officers, 7(j) coordinators, and othersresponsible for administering the program at the local level. Wealso interviewed 25 call contractors associated with the program.

We reviewed SBA's policies, regulations, and procedures forthe two 7(j) programs to determine program objectives. We alsoreviewed reports issued by two SBA consulting firms, by SBA in-ternal auditors, and by our office that have been critical of theprogram over the past 7 years (see app. II).

We selected four SBA regions for the review of call con-tracts based on the number of 7(j) regional call contracts awardedduring fiscal years 1978, 1979, and 1980. The contracts admini-stered by these regions represented 49 percent of the total numberof contracts awarded nationally (140 of 284 contracts) and about58 percent of the total amount of funds spent on regional callcontracting in those years. We reviewed the two contract types(competitive and noncompetitive 8(a)) in these regions and re-viewed about 25 percent of the contracts awarded during the 3-yearperiod. Our stratified random sample included 16 competitivelyawarded contracts and 24 noncompetitive 8(a) contracts. Of the24 noncompetitive 8(a) contracts, 10 were funded from the 7(j)(10)program, while 14 were funded from the 7(j)(1-9) program. Thefollowing table shows the number of contracts selected in eachSBA region.

PercentRegion Awarded Selected by GAO of total

New York 50 11 22.0

Chicago 34 11 32.4Philadelphia 31 8 25.8San Francisco 25 10 40. 0

Total 140 40 28.6

We randomly sampled individual task orders issued from eachof the 40 contracts selected. We excluded task orders that were

34

later canceled or that were not completed at the time of our re-view. We reviewed 1,425 task orders representing 44 percent ofthe total number of task orders issued under the 40 contracts weselected. In addition, we also gathered information from a fewtask orders prepared under contracts where indirect assistancewas provided. Indirect assistance includes task orders for grouptraining, seminars, special studies, and for assistance to SBAitself.

We gathered specific data on each type of call contract, suchas length of time to complete a task order, contract cost per day,cost per client, and who performed the work (contractor or sub-contractor). We collected data at the eight district and fourregional offices where task orders were issued, and when the in-formation was missing in the SBA files, we attempted to collect itfrom the call contractors' offices.

To obtain the views of recipients of management assistance,we administered a questionnaire to a random sample of 302 smallbusiness owners. For the sake of economy, we attempted to contact10 recipients from each of the 40 contracts reviewed. Where therecipient could not be contacted by telephone, we used up to fivereplacements and were able to obtain 302 completed interviews.

The responses from our interviews represent only clients wewere able to contact and who were willing to be interviewed. Insome cases, clients were reluctant to be interviewed, while inother cases we were unable to make contact because the client mayhave gone out of business or may have moved without leaving aforwarding number. Thus, the data collected is biased to theextent that it only includes information from recipients stillin business.

During the preliminary stages of the review, we met at theSBA central office with the Director, Office of Development As-sistance, and his Deputy to discuss their views of our contractselection process, task order sampling process, and telephone in-terview form. They agreed that the results from those four re-gions and associated district offices should be representative ofthe program nationally with minor local variations.

In addition to the regionally administered contracts, wereviewed all 27 7(j)(10) contracts, grants, and cooperativeagreements administered by central office during the same 3-yearperiod. We wanted to determine: (1) the basis for contractawards, (2) who was helped, and (3) the costs involved.

Time limitations made it impractical to review and measurethe quality of task-order preparation, the quality of the consult-ing reports, or the applicability of report recommendatons, otherthan through client interviews. Additionally, we did not attemptto review the qualifications of SBA's Management Assistance Offi-cers or the individuals who coordinated 7(j) assistance in the

35

district offices. However, we believe that the approach we se-

lected in conjunction with SBA staff fairly presents the status

of the 7(j) programs.

II

36

fa

APPENDIX I APPENDIX I

REPORTS ISSUED BY GAO

PURSUANT TO PUBLIC LAW 95-507

1. "Status Report on Small and Small Minority BusinessSubcontracting and Waiver of Surety Bonding for 8(a)Firms" (CED-80-130, Aug. 20, 1980)

The Small Business Administration has not fullyimplemented the section 7(j)(3) subcontracting programand the section 8(a)(2) surety bond wiiver provision ofthe Small Business Act. Under section 7(j)(3), SBA, withthe assistance of a presidentially appointed AdvisoryCommittee, is to encourage large businesses to placesubcontracts with small firms. Problems impeding pro-gress in implementing section 7(j)(3) include

--delays in establishing the presidentially appointedAdvisory Committee,

--the lack of specific committee functions andgoals, and

--the exclusive focus of the committee on Federalsubcontracting instead of on private sectorsubcontracting.

Despite problems in implementing section 7(j)(3), SBA hastaken several actions to help small and small minoritybusinesses compete in the private sector.

Under the surety bond waiver provision, the SBA Admin-istrator is authorized to waive any bond required by aGovernment procurement officer on contracts under SBA'ssection 8(a) Business Development Program. This provisionalso has not been implemented. A major cause for thisappears to be a disagreement or misunderstanding betweentwo SBA offices concerning who was responsible for imple-menting the provision.

GAO makes recommendations to help alleviate theproblems impeding implementation of the two provisions.

2. "Most Borrowers of Economic Opportunity Loans Have NotSucceeded in Business" (CED-81-3, Dec. 8, 1980)

SBA's Economic Opportunity Loans have not been aneffective way to help disadvantaged people start or improvetheir own businesses. More borrowers have defaulted onthe loans than have repaid them. Many who paid off theirloans have not remained in business. Furthermore, the

37

APPENDIX I APPENDIX I

outlook for borrowers with active loans is not goodsince many are in financial difficulty.

The program provides services to borrowers whoselimited capital, inexperience, and other factors makehigh rates of loss and business failure unavoidable.Nevertheless, program results could improve if SBAchanged the way it manages the program and took measuresto help borrowers overcome their undercapitalizationand inexperience.

If program results do not improve, congressional over-sight committees should determine whether the program'sobjectives could be better achieved by transferring itsfunds to other Federal programs for disadvantaged businesses.

3. "The 8(a) Pilot Program for Disadvantaged Small BusinessesHas Not Been Effective" (CED-81-22, Jan. 23, 1981)

SBA's use of a special pilot program which givesit the authority to demand contracts for the 8(a) programhas not been successful.

SBA (1) did not have enough information to properlyassess and match 8(a) firms' capabilities with pilot pro-curements and (2) approved 8(a) firms to perform pilot con-tracts without knowing their capabilities. GAO believesSBA made a poor choice of those firms that were awardedthe three initial pilot contracts.

There is a difference between Army, which was selected

as the pilot agency, and SBA over the way the pilot programcan be used most effectively. GAO is recommending that theCongress allow further testing of the pilot program in an

additional agency that, unlike the Army, has not demonstrated

its complete support of the 8(a) program.

4. "The SBA 8(a) Procurement Program--A Promise Unfulfilled"(CED-81-55, Apr. 8, 1981)

SBA's 8(a) Procurement Program gives noncompetitiveGovernment contracts and other aid to help disadvantagedbusiness owners become self-sufficient. Few aided firmshave graduated as competitive businesses. The bulk of 8(a)

contracts has gone to a select group of firms. Many firmshave not built up commercial sales, rely on 8(a) contracts,and view the program as an end in itself.

SBA is reluctant to remove from the program firms thatare needed to meet yearly contract volume goals. Because ofthis, other disadvantaged firms cannot participate. Insuf-ficient staff, vague graduation criteria, and poor records

38

APPENDIX I APPENDIX I

also hamper the program's effectiveness. Further, the smallbusiness community is concerned about the program's futureimpact on its businesses.

GAO proposes several alternatives and recommendationsto restructure the 8(a) program and resolve its problems.

5. "SBA's Progress In Implementing The Public Law 95-507Subcontracting and Surety Bond Waiver Provisions Has BeenLimited* (CED-81-151, Sept. 18, 1981)

The Small Business Administration, working with aPresidential Advisory Committee, has not fully implementedthe small business subcontracting provision. The committeehas focused on obtaining subcontracts from Federal contrac-tors rather than private businesses not heavily engaged inFederal procurements. SBA's efforts have been limited pri-marily to 1-year agreements with four corporations underwhich it refers potential subcontractors to them. Thecorporations have awarded only two subcontracts to thesmall businesses SBA referred.

SBA has not issued procedures for identifying andhandling surety bond waivers; consequently, no waivers havebeen granted.

GAO recommends changes SBA should make to maximizesubcontracting opportunities for small businesses. Also,GAO suggests that the Congress consider extending the bondwaiver provision for 2 years and require SBA to report tothe Congress on the provision's effectiveness.

39

APPENDIX II APPENDIX II

PRIOR REPORTS BY GAO. SBA INTERNAL AUDITORS,

AND PRIVATE CONSULTANTS UNDER CONTRACT TO SBA

REGARDING SBA's MANAGEMENT ASSISTANCE PROGRAMS

The following are summaries or excerpts from studies orreports relating to SBA's Call Contracting Program. I/

1. GAO report entitled "The Small Business AdministrationNeeds To Improve Its 7(a) Loan Program" (GGD-76-24,Feb. 23, 1976).

--Lack of coordination between SBA divisions in provid-ing management assistance.

--Loan borrower's need for management assistance notidentified at time of loan approval.

--Lack of effective followup system on managementassistance recommendations.

--Results of management assistance program had notbeen evaluated since 1969.

In 1976 we recommended that SBA improve coordination betweenthe district office unit responsible for providing management as-sistance and the unit responsible for servicing loans (portfoliomanagement). We also recommended that SBA evaluate the impact ofmanagement assistance to identify areas needing improvement. Ourrecent audit work indicates continuing deficiencies in theseareas. Specific problems are discussed in chapters 2 and 3 ofthis report.

2. Price Waterhouse and Company report on the Evaluation ofthe 406 Call Contracting Program (Apr. 1976). Theevaluation was conducted under an SBA contract.

--Management assistance resources are not always effec-tively utilized.

--The size and nature of the call contractors are notgiven sufficient consideration in the contractingprocedures.

--Consulting quality is not given sufficient considera-tion in the proposal evaluation process.

1/See chapter 1 for additional discussion of these reviews.

40

APPLNDIX II APPENDIX II

--Assistance is not sufficiently directed toward the

nature of the client and his needs.

-- Administrative procedures are not always consistent.

The Price Waterhouse report made recommendations aimed atimproving SBA's administration and operation of the program, withspecific attention for resolving those problems mentioned above.They recommended that SBA

-- standardize repetitive tasks to reduce duplicationof effort.

-- evaluate all management assistance programs to

improve coordination.

-- lower the subcontracting limit and use more specializedconsultants to improve the quality of services rendered.

-- improve problem identification techniques to improveeffectiveness of tasks.

-- use followup tasks to assist in implementing recom-mendations.

-- improve forecasting of anticipated management as-sistance requirements to better serve clients.

The report concluded that while the Call Contracting Program

is an effective tool in assisting small businesses, the long-runbenefits of the program could be much greater. Noting that therehad been no significant improvement in the success rate of theprogram over the previous 3 years, the Price Waterhouse reportstated that more substantial improvements in the administrative

procedures would be necessary to achieve improvements in theprogram's success rate.

3. Rockville Consulting Group, Inc. report of A Major ImpactStudy of SBA Management Counseling and Training Programs(Jan. 1980). The study was conducted under an SBAcontract.

The Rockville study provided a quantitative and qualitativeevaluation of the effectiveness of all of SEA's counseling andtraining programs. Part of the evaluation focused on the short-and long-run impact of management assistance programs on partici-pants. Some of the study's findings were that:

--Different types of SBA client firms responded verydifferently to the various management assistanceprograms offered and to the various types of districtoffice operations. In some cases, the assistanceprovided was of substantial help while, in othercases, it caused great harm.

41

APPENDIX II APPENDIX II

--Properly matching SBA's various management assistanceresources with SBA programs in the proper mix couldtriple the impact.

--Actual program goals and objectives centered on maxi-mizing the number of reported management assistanceclients, rather than on providing positive changes inclient behavior.

--The impact of the Call Contracting Program peaked in1975 and declined sharply since then.

--Only about 20 percent of the district offices reportedthat they use any evaluation process that could possiblydetermine whether call contractor diagnostic conclusions

were appropriate and were accepted by the client.

Several recommendations were made in the report, includingtypecasting clients to provide the management assistance servicesthat would be of most benefit to the client and implementing anevaluation program to determine the effectiveness of managementservices on the client. Regarding the Call Contracting Program,the study concluded that the program was effective with the moreexperienced business owners/managers. According to the study,however, this type of client dropped from 59 percent of call-contracting recipients during 1975 to 25 percent during 1977.Furthermore, the report concluded that the present trend of allo-cating call-contracting services would lead to a zero impact onclients since less experienced clients receive no significantbenefit from the services.

4. GAO report entitled "Most Borrowers of EconomicOpportunity Loans Have Not Succeeded in Business"(CED-81-3, Dec. 8, 1980).

In our report on SBA's Economic Opportunity Loan program wecommented that loan clients were not receiving SBA management as-sistance early enough to affect crucial decisions, nor were theseclients receiving assistance in sufficient scope and duration todevelop "entrepreneurial and managerial self-sufficiency." Werecommended that SBA test the effectiveness of providing moreintensive and timely management assistance as one technique foralleviating borrowers' undercapitalization and inexperience.

5. SBA Internal Audit report "Review of the 406 CallContracts Program," SBA Internal Audit Division(Nov. 1974).

--In determining overall needs for call contractingassistance, SBA (1) used two separate and uncoor-dinated systems and procedures (2) offered unclearor insufficient justification, and (3) providedno evidence that all other SEA programs wereconsidered.

42

APPENDIX II APPENDIX II

--SBA's administration of the program displayed (1) alack of detail and justification for task ordersissued, (2) insufficient review and monitoring ofcontractor performance and staffing, (3) inappro-priate use of contract funds, and (4) little as-surance that the completed effort of the callcontractor is consistent with the contract termsand conditions.

--Formal follow-up on management assistance givenwas rarely accomplished, resulting in insufficientassurance of the effectiveness of the contractors'performance or of the management assistance given.

43

APPENDIX III APPENDIX III

SELECTED RESPONSES BY RECIPIENTS OF

SBA's 7(j) (1-9) CALL-CONTRACT ASSISTANCE

The following are selected questions and the answersfurnished by 302 recipients of call-contract management andtechnical assistance. Because some recipients gave more than oneanswer to a particular question, the total number of responsesmay exceed 302.

1. How long after your last contact with the consultant did youget the report?

Number Percent

Within 1 month 158 52Between 1 and 2 months 62 21Between 2 and 4 months 22 7Over 4 months 10 3Did not answer 52 17

2. Of how much use, if any, was the written report?

Number Percent

Of very great use 48 16Of great use 55 18Of moderate use 50 16Of some use 43 14Of little or no use 70 23Did not respond 41 13

3. How much of what was recommended did you actually try to do?

Number Percent

All or almost all 65 21Most 41 13About half 35 12Some 38 13Little if any 57 19Did not answer 68 22

44

APPENDIX III APPENDIX III

4. Would you recommend this consultant to your businessassociates?

Number Percent

Definitely yes 131 43Probably yes 75 25Uncertain 30 10Probably no 19 6Definitely no 46 15Did not answer 3 1

5. If the need arose, would you request this consultant again?

Number Percent

Definitely yes 134 44Probably yes 70 23Uncerta in 21 7Probably no 22 7Definitely no 53 18Did not answer 3 1

6. After the assistance was provided, did SBA contact you aboutthe assistance you got?

Number Percent

Yes 165 54Uncertain 33 11No 102 34Did not answer 2 1

45

APPENDIX IV APPENDIX IV

U.S. SMALL BUSINESS ADMINISTRATION

3WASHINGTON, D.C. 20416

OWPIC 00 THE ADMINISTMATOR

AUG 2 8 1981

Mr. Henry EschwegeDirectorCommunity and Economics Development DivisionUnited States General Accounting OfficeWashington, D.C. 20548

Dear Mr. Eschwege:

As requested by your letter of July 30, 1981, we are pleased togive our views on the draft report entitled, OSBA's 7(j) Management

Assistance Program Reaching Limited Number of Clients: ChangesNeeded."

The General Accounting Office review and recommendations forimprovement show that this Agency has been headed in the rightdirection, but needs to focus more sharply on certain areas. Wehave been aware of this and appreciate the General AccountingOffice's corroboration of our views.

It should be noted that your report centers around several issueswhich occurred during the 1979-80 transitional period of thisprogram from the Management Assistance Division to the MinoritySmall Business Division. The Minority Small Business Division'sfield staffs were totally unfamiliar with the logistics involved inthe administration of the Call-Contracting Program. Further, ina majority of the field offices, transition was not as smooth as itshould have been. There were problems with low employee morale,lack of communication surrounded by uncertainties involvingpersonnel transfers and possible employment displacements, andcontinuous unclear communications relating to the 7(j) eligibilitycriteria, i.e. non-minority vs. minority.

Finally in late 1979, after obtaining full responsibility of theprogram and after permanent personnel positions were established,the Minority Small Business Division attempted to train fieldstaff. This process was curtailed because of a limited training

46

7-- . . . . .i ii I

APPENDIX IV APPENDIX IV

budget. Therefore, an extensive training program was not developedor further implemented for field staff. We fully believe thatcontinuous training and follow-up is necessary to sucessfully carryout any program transition. This will continue to be the case inFiscal Year 1982, and probably into Fiscal Year 1983, as weimplement P.L. 95-224 by using cooperative agreements in the 7(j)program.

We also realized the inconsistences involved within the 7(j) (10)Program and, therefore, early in Fiscal Year 1980 we initiated andstressed the importance of an instrument like the 7(j) Committee.This Committee has now agreed on the release of a cooperativeagreement announcement on a competitive basis to acquire 7(j)consultants for Fiscal Year 1982. By doing so competitively, wewill eventually reduce to zero the sole-source procurements such asthe ones described as being "ineffective" in the Report.

With respect to the individual recommendations the followingactions are being taken.

Recommendation

"(1) We recommend that the Administrator, SBA direct the AssociateAdministrator for the Bureau of Minority Small Business andCapital Ownership Development to:

- develop procedures for systematically screening all requestsfor management assistance which identify the types ofassistance programs available, and the situations and clientsthese programs are best capable of helping. Considerationshould be given to designating a qualified individual in eachdistrict office to recieve and evaluate all requests formanagement and technical assistance and refer them, asappropriate, to the Management Assistance Division or theBureau of MSB&COD;"

Response

We are addressing this in the Regional Operating Plan for FiscalYear 1982 i.e., "To establish better coordination at the DistrictOffice level among Management Assistance, Financial Assistance,Legal and MSB&COD officials to assure compatible actions are beingtaken with the specific firms."

Recommendation

establish a maximum task day cost allowable under negotiatedcontract for various types of call contract services;"

47

APPENDIX IV APPENDIX IV

Response

We are including this in the revised Standard Operating Proceduresso that proper negotiation will be required. We expect theseprocedures will be published in the latter part of September 1981.

Recommendation

"direct regional and district offices to follow existing agencyprocedures for:

(a) assuring that call contractors are not exceeding SBAsubcontracting limits, and (b) obtaining feedback onclient satisfaction with services provided by callcontractors."

Response

The Agency expects that the new Standard Operating Procedures,reinforced by the new automated Management Information System,which will be operational in early 1982, will fulfill these tworecommendations effectively.

Recommendation

"(2) To establish an effective planning process as a basic andintegral part of SBA's 7(j) (10) management strategy, werecommend that the Administrator, SBA, direct the AssociateAdministrator for the Bureau of Minority Small Business andCapital Ownership Development, to:

Define and prioritize 7(j) (10) program goals and objectivesconsistent with the program's legislative mandate; the numberand needs of program participants; and the availability of7(j) (10) resources. The 7(j) Committee represents anexcellent structure for accomplishing this."

Response

This has already been started with the agency's objective settingand budgeting process.

Recommendations

"-Develop a written plan describing how program resources will beused. This plan should be compatible with the agency's definedprogram goals and objectives."

48

APPENDIX IV APPENDIX IV

Response

We are now in the process of doing this (see response to priorrecommendation), which will be reinforced by Advance Acquisitionletters and Regional Operating Plan requirements in FY 1982.

Recommendations

"- Revise the 7(j) (10) standard operating procedures to clarify:

(a) the criteria and process for the allocation of 7(j) (10)program resources.

(b) criteria for 7(j)(10) project selection.

(c) the responsibilities of individuals charged withcontract monitoring."

Response

The revised Standard Operating Procedures mentioned previously willaddress recommendation (a). With respect to recommendation (b) theSmall Business Administration is introducing competitivecooperative agreements for 7(j) (10) needs.

Both the new Standard Operating Procedure and the Fiscal Year 1982Regional Operating Plan will meet the requirements of recommen-dation (c).

This concludes our comments on the report and we appreciated the

opportunity to review the report in draft form.

If you need any further assistance, please advise.

Sincerely,

Michael Cde as{

Administrator

(677000)

49